Microeconomics in Modules
and
Economics in Modules
Third Edition
Krugman/Wells
Module 6
Supply and Equilibrium
What You Will Learn
1
What the supply curve is
2
What affects supply
3
How the supply and demand curves
determine a market’s equilibrium price
and equilibrium quantity
4
In the case of a shortage or surplus,
how price moves the market back to
equilibrium
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The Supply Schedule
• A supply schedule shows
how much of a good or
service would be supplied
at different prices.
Supply Schedule for Cotton
Price of
cotton
(per pound)
Quantity of
cotton
supplied
(billions of
pounds)
$2.00
11.6
1.75
11.5
1.50
11.2
1.25
10.7
1.00
10.0
0.75
9.1
0.50
8.0
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The Supply Curve
A supply curve shows graphically
how much of a good or service
people are willing to sell at any
given price.
Price of cotton
(per pound)
Supply
curve, S
$2.00
1.75
As price rises, the
quantity supplied rises.
1.50
1.25
1.00
0.75
0.50
0
7
9
11
13
15
17
Quantity of cotton
(billions of pounds)
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The Law of Supply
• The law of supply says that other things being equal, the
price and quantity supplied of a good are positively
related.
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An Increase in Supply
• The improvement in
cotton-growing
technology generated
an increase in
supply—a rise in the
quantity supplied at
any given price.
Supply Schedule for Cotton
Price of cotton
(per pound)
$2.00
Quantity of cotton
supplied
(billions of pounds)
Before
After
improvement improvement
11.6
13.9
1.75
11.5
13.8
1.50
11.2
13.4
1.25
10.7
12.8
1.00
10.0
12.0
0.75
9.1
10.9
0.50
8.0
9.6
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An Increase in Supply
• This event is
represented by two
supply schedules, one
showing supply
before the
improvement, the
other showing supply
after the
improvement.
Supply Schedule for Cotton
Price of cotton
(per pound)
$2.00
Quantity of cotton
supplied
(billions of pounds)
Before
After
improvement improvement
11.6
13.9
1.75
11.5
13.8
1.50
11.2
13.4
1.25
10.7
12.8
1.00
10.0
12.0
0.75
9.1
10.9
0.50
8.0
9.6
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An Increase in Supply
Price of cotton
beans (per pound)
Improvement in the
technology for growing
cotton  more cotton
producers.
S1
$2.00
S2
1.75
1.50
1.25
1.00
0.75
0.50
0
7
9
11
13
15
17
Quantity of cotton
(billions of pounds)
A shift of the supply curve is a change in the quantity supplied of
a good at any given price, or a change in supply.
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Movement Along the Supply Curve
Price of cotton
(per pound)
$2.00
A movement along the
supply curve…
S1
S2
1.75
1.50
B
1.25
A
1.00
C
… is not the same
thing as a shift of
the supply curve.
0.75
0.50
0
7
10 11.2 12
15
17
Quantity of cotton
(billions of pounds)
A movement along the supply curve is a change in the quantity
supplied of a good as a result of a change in that good’s price.
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Shifts of the Supply Curve
Price
S3
S1
S2
Increase
in supply
Any decrease
“increase in
in supply
supply”ameans
means
leftward
a shift
rightward
of
the supply
shiftcurve:
of theat
supply
any
given
curve:
price,
at there
any is
agiven
decrease
price,inthere
the is an
increase in
the quantity
quantity
supplied.
(S1
Ssupplied.
(S1 S2)
3)
Decrease
in supply
Quantity
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Understanding Shifts of
the Supply Curve
• Changes in input prices
– An input is a good that is used to produce
another good.
•
•
•
•
Changes in the prices of related goods and services
Changes in technology
Changes in expectations
Changes in the number of producers
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Individual Supply Curve and
the Market Supply Curve
The market supply curve is the horizontal sum of
the individual supply curves of all firms in that market.
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Economics in Action
Only Creatures Small and Pampered
• According to a 2007 article in the New York
Times, the United States has had a severe decline
in the number of farm veterinarians over the past
two decades.
• The source of the problem is the higher demand
for pet veterinarians.
• Farm veterinary services and pet veterinary
services are substitutes in production.
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Supply, Demand, and Equilibrium
• Equilibrium in a competitive market: The quantity
demanded of a good equals the quantity supplied of that
good.
• The price at which this takes place is the equilibrium
price (a.k.a. market-clearing price):
– Every buyer finds a seller and vice versa.
– The quantity of the good bought and sold at that
price is the equilibrium quantity.
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Finding the Equilibrium Price and
Quantity
Price of cotton
(per pound)
Market equilibrium
occurs at point E, where
the supply curve and the
demand curve intersect.
Supply
$2.00
1.75
1.50
1.25
Equilibrium
price
E
1.00
Equilibrium
0.75
0.50
0
Demand
7
10
Equilibrium
quantity
13
15
17
Quantity of cotton (billions
of pounds)
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Price Above Its Equilibrium Level
Produces a Surplus
Price of cotton
(per pound)
There is a surplus of a
good when the quantity
supplied exceeds the
quantity demanded.
Surpluses occur when
the price is above its
equilibrium level.
Supply
$2.00
Surplus
1.75
1.50
1.25
E
1.00
0.75
0.50
0
Demand
7
8.1
Quantity
demanded
10
11.2
Quantity
supplied
13
15
17
Quantity of cotton
(billions of pounds)
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Price Below Its Equilibrium Level
Causes a Shortage
Price of cotton
(per pound)
There is a shortage of
a good when the
quantity demanded
exceeds the quantity
supplied. Shortages
occur when the price is
below its equilibrium
level.
Supply
$2.00
1.75
1.50
1.25
E
1.00
0.75
Shortage
0.50
0
7
9.1 10
Quantity
supplied
11.5
Demand
13
Quantity
demanded
15
17
Quantity of cotton
(billions of pounds)
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Summary
1. The supply schedule shows the quantity supplied at
each price and is represented graphically by a supply
curve. Supply curves usually slope upward.
2. A movement along the supply curve occurs when price
changes.
3. A change in the quantity supplied at any given price is a
shifts of the supply curve.
4. Five main factors shift the supply curve:
• A change in input prices
• A change in the prices of related goods and services
• A change in technology
• A change in expectations
• A change in the number of producers
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Summary
5.The market supply curve for a good or service is
the horizontal sum of the individual supply
curves of all producers in the market.
6.The equilibrium price, or market-clearing price,
is the price at which the quantity demanded is
equal to the quantity supplied.
7.When quantity supplied is equal to quantity
demanded, the market is at equilibrium quantity.
8.When the price is above its market-clearing level,
there is a surplus that pushes the price down.
9.When the price is below its market-clearing level,
there is a shortage that pushes the price up.
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